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Financing Modernization of DH Systems: Lessons Learned Internationally
Alexander Sharabaroff International Finance Corporation (IFC) World Bank Group
• Timisoara - Municipal investment, Romania (IFC ~$34.6 M)
• Botosani – Municipal investment, Romania (IFC ~$7.7 M)
• Bucharest – PPP project, Romania • KKS – Private DH company, Russia
(IFC $ 18.2M equity, $7.7M loan) • Mytischi - Municipal investment,
Russia (IFC $ 8.4 M) • A number of advisory projects
IFC Projects • Ukraine • Bulgaria • China • Croatia • Russia • Lithuania • Poland • Serbia • Belarus (biomass-based DH) • Large number of advisory
projects: e.g. • Moldova (Chisinau) • Regional Balkans Biomass DH
IBRD Projects
327,706 km
1,500,000 TJ and 10,000 GWh
Estimated Annual Energy Savings
Trench Length of DH Pipeline System, 2009
Installed DH Capacity, 2009
* Selected countries in ECA and EAP (excluding
Central Asia and Mongolia)
994,800 MWth
Estimated Annual GHG Reduction Potential
115,000,000 tons CO2e
Investment need estimate (up to 2020)
$ 70-100 Billion
2
DH World
Regulatory framework
Financing
Political commitment
3
Success Factors
Regulatory Framework
• Full cost-recovery (CAPEX / OPEX) for all customers
• Predictable and stable, politically independent
• Adjustment for fuel price • Incentives for EE
• Appropriate level of carbon dioxide prices…
• Adequate allocation of allowances
• Access to the power grid • Co-gen bonus for highly
efficient CHPs • Verification process • Cost-allocation methods • GHG regulation
• A minimum standard of building-level heat meter
• Heat-cost allocators • Heat meters • Legal base for CBB
• Often times cross-subsidized between residential and industrial tariffs
• Clear contractual obligations (price, amount (MCQ), duration, dispute res., etc.)
Heat Tariffs
• If properly designed, DH should be least-cost
• Targeted safety-nets/ pro-poor subsidies
• Heat payments spread throughout the year
• Good collection mechanism
Co-gen Incentives
Consumption-Based Billing
ETS / GHG Regulation
Fuel price Incentives
Affordability/ Payment Discipline
• Clearly defined property rights and concession terms
• Duration, tariff structure, payment terms (billing cycle), security, inflation, dispute res.
• Termination and buy-out terms
Concessions Ownership/PPP
4
• Serves 4.4 million people, 1.5 million households.
• Annual turnover: Euro 940 million (2007).
• Around 100 DH companies operating (only two companies are privately operated).
• Tariffs significantly below full cost. Subsidies are provided at municipal level.
Romanian DH Market Main Features
5
5
DH in Romania
6 6
DH in Romania is quite expensive..
..largely subsidized by municipalities
0
20
40
60
80
100
120
140
Cluj Timisoara Caras Severin Govora Dalkia Buzau Vrancea Bucharest Botosani2012
USD
/Gca
l
Residential Tariff Subsidy
96.1
78.0 71.4
60.4 52.8
0
20
40
60
80
100
120
Romania Average Germany Finland Poland Estonia
US$
/Gca
l
7
Electricity Sales, kWh
Heat Sales, GJ
Billing Relationships, LEI
Tariff approval
Tariff methodologies and calc
Subsidy provision, LEI
DH network
National Power Grid
ModernCalor
(CHP and HoBs)
7
DH in Romania, cont’d
• Acceptable regulatory environment
ANRSC -methodology for heat tariff for heat-only boilers and T&D network;
ANRE – methodology for heat and electricity generated at CHPs;
Municipalities approve final end-user heat tariffs and related subsidies.
• Cost-plus method (allows for 5 percent profit) is used for heat tariffs.
• Co-generation bonuses for eligible high-efficiency CHPs.
• EU Regional Operational Programs gave a substantial boost for DH rehabilitation – however some municipalities experience difficulties securing their share of financing (bonds, commercial banks)
Regulatory Framework, Highlights
8
• Client: Municipality of Botosani
• DH Company: Modern Calor (heat sales
140,000 Gcal)
• IFC financing €7.6 million. Total project
cost is €45.7 million (50% EU ROS).
• Technical design prepared by JASPERS
Botosani DH Rehabilitation Botosani DH Project
• Construction of a new cogeneration plant
and Heat-only Boilers
• 2 x 4MWe gas-engines
• 2 x 52MWth Heat-only boilers
• Upgrade of the heating T&D network
• Installation of ~25 km of T&D-
network and rehab of 15 GHS
• Re-connection of 21 large consumers
• EE in Buildings Pilot
Technical details
9
Botosani DH Results
8%
51%
31%
15%
24%
0%
10%
20%
30%
40%
50%
60%
DHBenchmark
Botosani DH2007
Botosani DH2013
BotosaniExpected
DH Moldova
Heat Losses, %
0.1
8.6
4.7
0.5
1.8
0
1
2
3
4
5
6
7
8
9
10
DHBenchmark
Botosani DH2010
Botosani DH2012
BotosaniExpected
DH Moldova
Bre
akd
ow
ns
per
yea
r p
er k
m o
f n
etw
ork
Network Breakdowns
2
44
12
6
20
0
5
10
15
20
25
30
35
40
45
50
DHBenchmark
Botosani2010
Botosani2013
BotosaniExpected
DH Moldova
Rat
io: r
epla
ced
wat
er r
elat
ive
to
net
wo
rk v
olu
me
per
an
nu
m Make-up water
5
90.37
54
17 20
0
10
20
30
40
50
60
70
80
90
100
DHBenchmark
Botosani DH2010
Botosani DH2012
BotosaniExpected
DH Moldova
kWh
/Gca
l
Electricity Consumption
Continuous support through Advisory Services
10
•Fuel price
•Fuel consumption
•Fuel transportation (for solid fuels)
•Fuel mix
•Other fuel-related costs
Fuel costs
•Manpower
•Salaries
•Other social benefits costs
Personnel costs
•Operation and Maintenance (O&M) costs
•Outsourcing costs
•Administration costs
•Other costs (including rents and leases, debt service, etc)
Other operational
costs
•Planned depreciation
•Normal depreciation Depreciation
• Following investment, IFC supports the Client in
improving operational efficiency through:
• Capacity building for DH company
• Identification of technical and non-technical
opportunities to reduce the cost of heat-supply
• Technical: operational modes, CHP/HoB
load optimization, EE investments, etc.
• Non-technical: staffing, organizational set-
up, admin costs, etc.
DH Affordability Advisory
0%
20%
40%
60%
80%
100%
Hungary Poland Finland
Fuel Personnel Depreciation Other
12-20 %
Up to 20 %
Up to 35 %
Up to over 50%
19.5 – 146.3%
Make-up water savings
Heat losses reduction
Heat consumption reduction
Fuel consumption reduction
IRR
11
Results from DH rehab projects internationally
•Croatia
•Serbia
•Bosnia and Herzegovina
•Kosovo
•Possibly China and
Mongolia
12
Unlocking the Potential for Private Sector Participation in District Heating
Review of Institutional and Regulatory Framework Ownership, concessions, tariffs
Barriers to private sector
Recommendations (broader World Bank Group)
International best-practice business and financial models PPP options: selected private minority equity, private
equity via stock exchange, majority private ownership (with municipalities retaining minority stake, etc.)
Fully privatized models: including majority private equity, selected private minority equity, SPV, etc.
Heat entrepreneurship model, etc.
Identification of investment opportunities for the private sector
13
Private Sector in DH
Annex Slides
IFC: Part of the World Bank Group
16
Conciliation and
arbitration of
investment
disputes
Guarantees of
private sector
investment’s
non-commercial
risks
Interest-free
loans and grants
to governments
of poorest
countries
Loans to middle-
income and
credit-worthy low-
income country
governments
Solutions
in
private
sector
development
Equity/Quasi-Equity
Long-term Loans
Debt mobilization
Risk management
Advisory Services
IBRD
International
Bank for
Reconstruction
and
Development
IDA
International
Development
Association
IFC
International
Finance
Corporation
MIGA
Multilateral
Investment and
Guarantee
Agency
ICSID
International
Center for
Settlement of
Investment
Disputes
17
Investments: 612 new projects in 113 countries
Advisory services: $232 million in program expenditures
$24.8 billion in financing: $18.3 billion for IFC’s own
account, $6.5 billion mobilized
$49.6 billion committed portfolio
IDA countries account for almost half of IFC projects
overall: $3.5 billion invested in Sub-Saharan Africa
Fiscal Year 2013 Highlights
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